Canada operates a unique tax system. In Canada, you will come across taxes like the Goods and Services Tax (GST), provincial sales taxes, and, in some provinces, the Harmonized Sales Tax (HST).
For some taxes, you’ll have to pay on both federal and provincial/territorial government levels. Especially for a new business owner, the entire system may be confusing. Here, we’ve distinguished between federal and provincial taxes to aid easy understanding and tax-compliant operations.
Federal Vs. Provincial Taxes in Canada
In Canada, some types of taxes, such as income and sales taxes, are levied on both the federal and provincial levels. However, the tax rates are not the same.
Income Taxes
Income tax is a tax levied on your taxable personal or business income. In Canada, you pay income tax on both federal and provincial levels of government.
But, while federal income tax has a fixed tax bracket rate that applies nationally for each year, provincial tax rates differ based on province. For instance, in 2022, Ontario reduced small business tax rates from 3.5 to 3.2 percent to encourage growth.
According to the CRA, the federal income tax bracket for the tax season 2022 is as follows:
| Tax rate | Income bracket |
| 15% | The first $50,197 |
| 20.5% | The next $50,195 (from above 50,197 to $100,392) |
| 26% | The next $55,233 (from above $100,392 to $155,625) |
| 29% | the next $66,083 (from 155,625 to $221,708) |
| 33% | over $221,708 |
For the provincial income tax, the CRA has a list of all the provinces and their tax rates. The provincial tax law states clearly that your province tax will be calculated based on the province you are living in on December 31.
The income tax rate adjusts to your income; the more you earn, the higher your tax rate. And the Canadian government expects everyone to file their annual tax returns for the previous year ended in December. 31, by April 30.
Note that delay in filing your income taxes or failing to file at all may attract severe consequences to your business. If tax seems a complicated task for you or you get stuck in the process, it is advisable to seek professional help. A tax consultant may be the best hand here.
Sales Taxes
Sales taxes are levied on the purchase of goods and services at the retail level. Sales taxes in Canada center around four main taxes:
- The Goods and Services Tax (GST)
GST applies to most goods and services produced in Canada, and the rate is 5%. Although it provides a way for many business inputs to be free from tax, the GST constituted a new additional compliance burden for many small businesses.
- The Provincial Sales Tax (PST)
PST applies when an individual acquires a taxable good or service in the provinces of Saskatchewan, Manitoba, and British Columbia. PST rate is 6%.
- The Quebec Sales Tax (QST)
The QST is a tax collected on most goods and services produced in Quebec. QST is calculated at 9.975% on the selling price after subtracting the GST.
- The Harmonized Sales Tax (HST)
HST combines a portion of the provincial sales tax and the GST in some provinces. In provinces where HST applies, it is added to GST to make up 15%, except for Ontario, where the rate is 13%.
While the federal levies GST, the province levies PST, QST, and HST. This means that if you have a business in Nunavut, for instance, you pay GST plus their provincial tax. However, QST pertains only to businesses operating in Quebec, while HST applies in Nova Scotia, New Brunswick, Newfoundland and Labrador, Ontario, and Prince Edward Island.
Do Your Taxes Right
For every business in Canada, federal and provincial taxes are compulsory. And as a small business, handling your taxes with utmost care should be among your priorities. If you have difficulties understanding the CRA tax payment or tax structure, an expert advisory can guide you through your tax journey.
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